Debt consolidation has become increasingly frequent among the part of the American population most burdened by credit card debt. Debt consolidation is the process of uniting many outstanding high interest credit card debts under one lower or fixed-interest loan.
Debt consolidation is helpful for those who struggle every month to pay the minimum balances on their outstanding debt. It allows the debtor to make a plan which, over the course of several months or several years, helps to pay off their debt. A debt consolidation loan will usually have a lower interest rate than their credit cards, so consumers will end up paying less over time than they would if they were to just pay their minimum credit card balances.
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Despite the fact that many debt consolidation services are legitimate, the FTC wants to consumers to be wary of advertisements that seem to promise more than reasonable results. Some debt consolidation firms, the FTC warns, may actually require the consumer to file for bankruptcy, which can devastate consumers' credit and cost attorneys' fees.
The FTC encourages debtors to first talk with their creditors, who may be willing to work out a different payment plan. They also suggest contacting a credit counseling service. These companies negotiate with creditors to develop debt repayment plans, and may also offer legitimate credit card debt consolidation loans. Finally, similar to straight credit card debt consolidation, debtors may obtain a second mortgage or a home equity line of credit to consolidate their debt.
However, bankruptcy may be the only option for those with terrific debt. It is imperative to realize that as of October 2005 congress made sweeping changes to bankruptcy laws. The net effect is to give debtors more incentive to file Chapter 13 rather than Chapter 7 bankruptcy. Chapter 13 allows debtors with steady incomes to keep property that they would otherwise lose.
Debt consolidation is an attractive alternative to bankruptcy. Though there are legitimate credit counseling firms out there, the consumer must be aware that some who promise debt consolidation are, in fact, pushing their clients into bankruptcy.
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